Dollar General Corporation (DG) is a discount retailer that provides various merchandise products in the southern, southwestern, Midwestern, and eastern United States.
The company initiated a dividend in 2015 at a quarterly rate
of 22 cents/share, and has managed to boost it to 42 cents/share in 2021. The
rate of the last dividend increase was 16.67% in March 2021. I expect a higher than average
dividend growth, because the company is in the initial phase of dividend
growth, has a low dividend payout ratio and it also grows earnings at a decent
rate.
Between 2011 and 2020, the company managed to increase
earnings from $2.22/share to $10.62/share. The company is expected to earn
$10.19/share in 2021.
Growth in earnings per share will be driven by increase in
number of stores, increases in same-store sales, and share buybacks. Driving
profitable sales growth and capturing growing opportunities should serve DG
well, along with improving its advantage as a low-cost operator.
Dollar General offers compelling value and convenience to
its shoppers, through competitive prices in a small store format. Most of the
goods sold by Dollar Stores are food and daily essentials, which are less
frequently purchased online and are for immediate consumption, limiting the
appeal of waiting days or more for delivery. Dollar stores are able to open in
areas other retailers wouldn't because of their small size. A large portion of
new stores opened in the US this year are Dollar stores, with about 1/3rd
of them being Dollar General stores.
The company offers convenience to its shoppers, has the
advantages of scale, and has the purchasing power to maintain low costs. It
offers a lot of private labels in its stores, and a limited number of items,
which is good for margins. Most of DG’s stores are in smaller towns, which
makes it a very competitive option for shoppers and explains the high gross
margins. The company can increase penetration in urban markets, which can bode
well for sales. Only about a quarter of stores are in urban areas. This means
that 75% of stores are in areas with population of less than 20,000 people.
They are strategically placed in food deserts, where other grocery options are
miles away. The typical consumer is a lower-income family, that doesn’t shop in
large quantities.
Investing in high-growth opportunities, including new store
expansion and other strategic initiatives, should remain at the top of the
priority list when it comes to capital allocation. The company can also
continue investing in its distribution center network, in order to support new
store growth and increased productivity. Initiatives include focusing on
non-consumables, DG Fresh, and Fast Track.
Dollar stores are also capturing more affluent shoppers
hunting for discounts on essentials. Consumers may be looking to save even more
money now that inflation is ticking up.
Dollar General has repurchased shares at a steady clip over the past decade. It looks like the company has managed to repurchase at least 3% of shares outstanding in each year since 2011. The only exception is in 2018, when it repurchased 2.56%.
The dividend payout ratio started at 22.30% in 2015 and is
at 13.60% today. There is ample room for future dividend growth from earnings
growth, as well as a gradual increase in the dividend payout ratio.
The stock is selling for 21.44 times forward earnings and
yields 0.77%. While the company is at the top of its valuation range in terms
of P/E, it will most probably grow earnings per share at a decent rate over the
next decade.
Relevant Articles:
- How to select winning retail stocks
- Invest in Products People Love
